WASHINGTON Wholesale inflation plunged in August by the largest amount in nearly two years, reflecting a steep drop in energy prices. But in less positive news, retail sales remained in the doldrums in August.
The Labor Department reported Friday that wholesale prices fell 0.9 percent last month, nearly double the 0.5 percent decline that economists had been expecting. The price moderation followed three months in which wholesale costs had shot up at levels exceeding 1 percent a month as energy costs had surged.
The Commerce Department reported that retail sales fell by 0.3 percent in August, however, a much weaker showing than the 0.3 percent rise that economists had been expecting. And the August slump followed an even bigger 0.5 percent decline in July, the worst showing in five months and weaker than first reported.
With unemployment rising and home prices falling, consumers are cutting back on spending, a potentially ominous development for the economy since consumer spending accounts for two-thirds of economic growth.
Core inflation, which excludes energy and food, was also well-behaved, edging up just 0.2 percent in August, right in line with expectations, and well below the 0.7 percent spike of the previous month.
The sharp retreat in wholesale prices will be welcome news at the Federal Reserve, which had been worried that it might have to start raising interest rates if inflation pressures did not start to moderate.
Fed officials are expected to keep rates unchanged when they meet next Tuesday. With inflation retreating, they will likely hold rates steady for the rest of this year.
If the Fed had been forced to start raising interest rates it would have presented another problem for an economy facing a host of headwinds from rising unemployment, a prolonged housing recession, a severe credit crunch and a troubled financial system.
The 0.9 percent drop in wholesale prices, the largest one-month decline since October 2006, could show up in lower prices for shoppers eventually. The August report on consumer prices will be released next Tuesday.
Even with the August decline, wholesale prices over the past 12 months are up by 9.6 percent, the second biggest 12-month price change in the past 27 years, exceeded only by a 9.8 percent jump for the 12 months ending in July.
Inflation has been driven up sharply this year by the surge in energy prices as crude oil hit an all-time high of $147 per barrel in early July. Since then crude prices have fallen sharply and are now trading close to $100 per barrel.
That decline has helped to push gasoline pump prices down from a record of $4.11 a gallon in mid-July to around $3.68 currently. Those prices may rise a bit depending on how much disruption Hurricane Ike does to refinery operations along the Texas coast.
For August, gasoline prices at the wholesale level fell by 3.5 percent, the sharpest drop since a 4.6 percent decline in April. The price of natural gas fell by 5 percent, home heating oil costs were down 13.6 percent and the cost of liquefied petroleum gas fell by 19.5 percent.
Food costs edged up 0.3 percent in August, matching the July gain. A big 13.2 percent plunge in the price of fresh vegetables was offset by increases in the cost of pork, eggs and processed fruit and vegetables.
The 0.2 percent rise in prices excluding food and energy left core inflation rising by 3.6 percent over the past 12 months, the highest since a 3.7 percent increase for the 12 months ending in May.
The core inflation figure was helped by declines of 0.3 percent for the price of new cars and 1.9 percent for the cost of light trucks, a category where sales have been slumping as energy prices surged this year.